ARTNA

Business Context and Reporting Period

Company: Artesian Resources Corporation (Delaware)

Reporting Period: Quarterly and six-month period ended June 30, 1999.

Business Overview: The Company operates Artesian Water Company, Inc., the oldest and largest regulated public water utility in Delaware, serving approximately 62,000 metered customers and a population of 200,000. The business is subject to regulation by the Delaware Public Service Commission (PSC) and seasonal weather fluctuations.

Key Financial Metrics

All figures in thousands, except per share data.

Note: Working Capital calculated as Current Assets ($5,316) minus Current Liabilities ($14,566).

Material Changes vs. Prior Period

• Revenue Growth: Water sales revenue increased 1.8% in Q2 and 3.5% for the six months ended June 30, 1999, primarily driven by a 3.1% growth in the number of customers served.
• Profitability Decline: Net income decreased 33.3% in Q2 and 20.1% for the six-month period compared to 1998. This was driven by increased operating expenses and a one-time write-off.
• Expense Increases: Operating and maintenance expenses rose due to increased payroll (new hires, merit increases, and a ~20% rise in medical insurance premiums) and a $165,000 write-off of unamortized rate case expenses.
• Depreciation: Depreciation and amortization increased 34% in Q2 due to capital additions.
• Financing Activity: The Company issued 325,000 shares of Class A Non-Voting Common Stock in April 1999, raising approximately $7.5 million to reduce short-term borrowings. Additionally, the Company entered a $4.45 million promissory note to repurchase stock from the Taylor family.

Guidance, Outlook, and Risks

• Rate Proceedings: On April 30, 1999, the Company filed for a 10.35% rate increase ($2.7 million annualized). Temporary rates of up to $2.5 million annualized were approved and became effective July 1, 1999.
• Capital Requirements: Estimated capital investments for the remainder of 1999 are approximately $7.7 million, to be financed by operations and short-term borrowings. An additional $1.4 million is expected to be financed by developer contributions.
• Liquidity: The Company reported a working capital deficit of $9.3 million as of June 30, 1999, attributed to borrowings for utility plant investment and the current portion of the stock repurchase note. The Company maintains $35.0 million in lines of credit with $29.0 million available.
• Weather and Drought: A drought emergency declared in August 1999 in northern New Castle County has reduced water demand and pumpage. The financial impact of this reduction is currently undetermined.
• Year 2000 Compliance: The Company is compliant as of June 30, 1999, with no significant capital expenditures anticipated for the remainder of the year for Y2K purposes.

Investor Verification Checklist

• Rate Case Outcome: Verify the final approval of the permanent rate increase requested in April 1999 to ensure the projected $2.7 million revenue increase is realized.
• Drought Impact: Monitor the duration of the drought emergency and its specific effect on water sales volume and revenue for the remainder of 1999.
• Debt Service: Review the terms of the $4.45 million promissory note for stock repurchase, specifically the interest calculation based on dividends and book value adjustments.
• Expense Trends: Assess whether the 20% increase in medical insurance premiums and other payroll costs are sustainable or one-time anomalies.
• Capital Expenditures: Confirm that the projected $7.7 million in remaining capital expenditures aligns with cash flow from operations and available credit lines.